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Unraveling the Complexities of Global Intercompany Service Transactions Part 4: A Focus on Regulatory Issues

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5 minute read

Part 1 of this series provided an overview of the process, tax, and regulatory complexities of intercompany service transactions. Part 2 and Part 3 took a more in-depth look at process- and tax-related challenges. In this final installment, we review the regulatory issues that can complicate intercompany transactions.

A World of Change & Inconsistency

For companies that transact globally, a complex web of disparate, ever-changing, country-specific regulations govern many aspects of the organization’s operations, including intercompany service transactions. These regulatory requirements have the potential to bog down corporate back-office functions, especially if the organization fails to establish the proper processes, controls, and governance.

For instance, it’s not uncommon for multinationals to run into trouble settling intercompany transactions simply because they don’t have an accurate way to meet the regulatory requirements that make settlement possible. Ever-changing requirements vary considerably from one country to the next and compound the complexity many organizations are forced to navigate.

Treasury-related regulations are among the many requirements that can drive complications. A prime example is the movement of cash across borders. In China, South Africa, and other currency-restricted countries, regulations on the movement of cash can make it difficult to be paid, or to net payments, out of those jurisdictions. If an entity based in those countries provides intercompany services to entities in other regions, it can’t simply issue an intercompany invoice and expect payment through its standard processes.

Unless the company meets the relevant requirements (such as currency control limitations, rules forcing the currency to be used, supporting documentation as to the nature of the underlying transaction), cash cannot leave that jurisdiction, creating a major hurdle to netting payments and settling transactions.

Foreign exchange issues also present challenges for multinational companies. Billing services across borders often results in foreign exchange gains or losses. If these transactions remain unsettled due to regulatory missteps, it can generate unrealized gains and losses, making it difficult to balance and close the books.  

Treasury-related complexities such as these span the entire intercompany process—from invoice creation, to journal entries, to settlement. As a result, it’s not feasible to develop a standard intercompany transaction process that fits worldwide. While the bulk of the process can (and should) be standardized, it will need to accommodate and reflect differences in regulatory requirements across the globe. The more manual steps in the intercompany process, the more challenging it will be to adapt the process to handle country-specific regulatory exceptions.

The Indirect Tax Factor

Regulations that govern indirect taxes also can create intercompany service transaction difficulties, especially as the regulatory climate around withholding and paying indirect taxes grows more complex.

Historically, most countries adopted a consistent standard that required the seller (the entity billing for the service) to apply the correct indirect tax on the invoice and the buyer (the entity paying for the service) to pay the stated tax. Today, you’ll find a more diverse range of approaches to indirect tax. In other countries, such as in Sweden and Poland, industry-specific (such as the construction industry) invoicing measures apply that seek to combat indirect tax (VAT) fraud by either putting the onus of VAT reporting exclusively on the buyer or require the indirect tax to be paid into a government-controlled bank account instead of a seller bank account. Such indirect tax regulations can vary both by country and by industry.

Regulations also can impact the types of intercompany service transactions you can engage in and bill for legally. In some countries, an employee in one entity can’t provide tax services to other entities unless he/she is a licensed accountant in that jurisdiction. Similarly, an employer can’t provide legal services to another internal entity unless the staff member involved is admitted to the bar in that jurisdiction.

Some countries have labor regulations that prohibit one entity from providing staff resources to another unless the company is licensed to operate as a temporary staffing agent. Even the mechanics of issuing the intercompany invoice can run afoul of regulators. In heavily regulated countries, intercompany charges can’t be settled unless there is a physical invoice, which many entities don’t generate for intercompany transactions.

The task of reporting on intercompany service transactions requires compliance with a whole host of regulations that vary by country, and failure to comply can result in tax penalties and other costly consequences. Companies typically must report on the nature of the services provided, the transfer price, and any settlement discrepancies (both within an entity and across the enterprise).

Additionally, some countries require organizations to report certain data to their central bank or other authorities that track trade balances, such as total transactions for a given period or individual transactions that exceed a certain dollar amount. Gathering, calculating, and reporting all the required data, accurately and in a format that meets each country’s requirements, can be difficult when intercompany processes are manual, decentralized, and require working across disparate ERP systems.

When Process & Regulatory Issues Collide

A challenging regulatory landscape can both complicate and strain a global organization’s intercompany processes. The most common process pain points triggered by regulatory requirements include:

  • Keeping policies and procedures current on intercompany regulations that differ greatly across the globe and change frequently

  • Continually updating multiple ERP systems each time an intercompany regulation changes

  • Ensuring that complex regulations are made easy for staff to understand—eliminating the inconsistencies that can result when different entities don’t interpret and follow a regulation the same way

Additionally, when different entities use different ERP systems, the company can lose transparency related to the line-level details of each transaction. In fact, it’s this very loss of transparency that has spurred the trend toward tighter regulations around intercompany service transactions (e.g., BEAT penalties). To reduce the opportunity for unscrupulous companies to hide money from tax authorities and other agencies, countries have instituted stricter regulations designed to improve controls and transparency.

The more manual the intercompany service transaction process, the more difficult, time-consuming, and costly it is to meet the associated regulatory requirements. That’s why many global organizations turn to BlackLine Intercompany for technologies that reduce the regulatory, tax, and process complexities and risks of their intercompany service transactions.


Get your copy of a global survey research report that examines essential questions about the state of intercompany at multinational companies.